The Billing/Accounts Receivable/Cash Receipts Process:
This chapter explores in detail the B/AR/CR process. We will examine managerial decision making perspectives concerning this process; technologies available to support this process; and various models of this process (DFD's, ERD's, and system flowcharts). Finally the chapter will explore The Control Matrix for this process.
Billing/Accounts Receivable/Cash Receipts Process Activities:
Bill Customers
Manage Customer Accounts
Secure Payments from customers for goods or services
Definition: Process interacting the structure of people, equipment, methods and controls designed to create information flows and records that accomplish:
a) Support Work routines of the credit department, cashier and A/R department - by capturing, recording, and communicating data resulting from the tasks of billing customer, managing customer accoungs, and collecting amounts due from customers
b) Support the problem solving process of financial managers - by managing the controller and treasury functions
c) Assist in preparation of internal and external reports including GAAP-based financial statements
Billing/Accounts Receivable/Cash Receipts Information Flows:
1. Facilitates repetitive work routines of the credit department, the cashier, and the accounts receivable department. These are the horizontal information flows.
2 The vertical flows support the problem-solving of financial managers and also help in creating financial reports for internal and external use. Horizontal Information Flows (10), please desccribe them:
1) The shipping department sends a shipping notice to the billing sector of the AR Dept.
2) The AR billing dept sends an invoice to the customer
3) The AR billing dept sends an invoice to the General Ledger
4) The AR billing dept sends an invoice to the cash receipts part of the AR dept.
5) Payment is received from the customer by the cashier
6) The cashier deposits the payment in the bank
7) The cashier sends a payment notice (RA) to the AR cash receipts dept.
8) The cashier sends a notice of the cash received to the General Ledger
9) The AR cash receipt dept compares (4) and (7) and posts to the customer account
10) The AR cash receipt dept sends notice of the cash applied to the General Ledger
Vertical Information Flows, explain:
Technologies Supporting OE/S Process:
CRM - Customer Self Service. Customers can log on to the web site, obtain information about the bill, get errors corrected, and resolve disputes if any. Helps in accelerating the payments made by the customers. (link to anything already in the wiki, e-mail if you need help doing this)
Digital Image Processing: Computer-based system that captures, stores, retrieves, and presents images of objects such as pictures, and documents. It can make an electronic image available anywhere there is a connection to the system.
Write narratives for each of the models provided in chapter 11 starting with:
B/AR/CR Process Context Diagram:
Once the shipping department ships the order, the B/AR/CR dept is notified. The B/AR/CR then sends the invoice to the customer and also notifies the General ledger process. Periodic customer statements are sent to the customer according to the payment agreements. Once the customer mails the payment along with the RA, the check is endorsed and deposited and again the GL process is notified of the payments so that the books can be updated. If there are any returns, receiving clerk notifies B/AR/CR of the returns.Then B/AR/CR sends a credit memo to the customer and also notifies the GL process so that the necessary adjustments can be made.
B/AR/CR Process Level-0 Diagram:
The sales order notification and the shipping's billing notification must both exist before the billing process can begin.
The perform billing process retrieves data from the customer master data and updates the sales event data.
An invoice is sent to the customer and the accounts receivable master data is updated. In addition, the general ledger is updated to show a sale and accounts receivable balance.
Accounts receivable data is sent to the manage customer accounts process.
The manage customer accounts process sends out periodic statements based on the accounts receivable master data.
If items are returned, the manage customer accounts process gives the customer a credit memo and updates the accounts receivable master data. Data is also needed from the accounts receivable master data to validate the return. The general ledger is also updated to reflect the returned merchandise.
Long-standing accounts receivable items are retrieved from the A/R master data and the manage customer accounts process determines the estimated bad debts and write-off, which are sent to the G/L process. This data is also recorded in the AR adjustments event data and the A/R master data is updated to show a credit to accounts receivable.
A/R master data is also sent to the receive payment process. When the customer sends in a payment, a deposit slip is generated, the cash
receipts event data is updated, the A/R master data is updated, the G/L process is updated, and a remittance advice is filed.
B/AR/CR Process Level-1 (process 2) Diagram:
The sales order notifications and shipping's billing notifications are compared for billing purposes.
Descrepancies are rejected.
Validated shipping notifications are prepared into invoices.
Information from the customer master data is used to address and send the invoices to the customer.
Accounts receivable master data table is updated to reflect the amount of the sale.
Sales event data table is updated.
Invoice is sent to the customer and the general ledger is updated.
Types of Billing Systems:
In general, two kinds of billing systems exist:
Post-billing system - invoices are prepared after goods have been shipped and the sales order notification has been matched to shipping's billing notification. This link provides an example of a post-billing system, http://www.dmbi.com/postbill.htm.
Prepost-billing system - invoices are prepared immediatley on acceptance of a customer order, after inventory and credit checks have been accomplished. Pre-billing systems often occur in situations where there is little or no delay betwen receipt of the customer's order and its shipment. For this type of system to operate effeciently, the inventory control system must be very reliable. If an order is accepted and an item then turns out to be unavailable, all accounting entries would have to be reversed.
B/AR/CR Process Level-1 (process 3) Diagram: Page 390
The customer's payment (check and remittance advice) are received. 3.1 -The check and remittance advice are compared. Checks and remittance advices that do not agree are rejected from being processed further until the discrepancies are resolved. The validated payments are processed further - 3.2 - checks are separated from the RAs, are endorsed, and are then prepared for deposit. 3.3 Deposit slips and the endorsed checks are sent to the depository bank. The cash receipts data is input and stored in the cash receipts event data store. The General Ledger Master is updated by the new cash receipts data that is posted. 3.4 The customer's payment details are recorded from the validated RAs. The customer payment data updates the correlating records in the Accounts receivable Master data file. Copies of the RAs are stored in the remittance advice file after all customer payments have been entered.
B/AR/CR System Flowchart (Billing Function): Page 395
The accounts receivable / billing ("AR/B") clerk keys in a request to the computer for the "Shipments not yet billed" report. The report is generated by the computer and displayed to the AR/B clerk who then reviews the report and selects the shipments to be billed. After the selection is made, the clerk keys in the selection of invoices on the computer and prepares a batch total of the invoices. The computer creates and prints the invoices and updates the accounts receivable, sales event, and general ledger data. The system then sends a "Billing completed" notice which is displayed on the screen for the AR/B clerk. The "Billing completed" report includes the amounts posted to the accounts receivable and related general ledger accounts. The computer generated invoices are also sent to the customer. The AR/B clerk reviews the "Billing Completed" report and compares the manual batch totals to the computer generated batch totals (run-to run total check). If any differences are noted in the two batch totals, an error reotine is initiated to resolve the differences (error routiine not shown).
Types of Billing Systems (pp. 394)
Post-billing system-invoices are prepared after goods have been shipped and the sales order notification has been matched to the shipping's billing notification. A post-billing system is normally used in the B2B (business-to-business) marketplace.
Pre-billing system-invoices are prepared as soon as the customer's order is accepted; this is often employed when there is relatively no delay between order acceptance and shipping. A pre-billing system is normally used in the B2C (business-to-consumer) marketplace.
B/AR/CR System Flowchart (Cash Receipt Function): page 401
Mailroom clerk recieves checks and remittance advices from the customer. He/she endorses the checks. The remittance advices (RAs) are organized in such a way that the stubs can be used as turnaround documents. Batch totals are also prepared.The cash receipts data is scanned with OCR into the system. The RAs are sent to accounts receivable. The computer edits the data, compute batch totals, updates databases and prints 2 copies of deposit slips along with other various cash reports. Both copies of the deposit slips are sent to the cashier. The computer displays the batch totals. The mailroom clerk reconciles these to the batch totals previously prepared. If everything reconciles, the checks are sent to the cashier. The cashier compares the deposit slips with the checks. The checks along with one copy of the deposit slips are deposited at the bank and the second copy of the deposit slips are filed.
Describe the data structures from the ERD model provided in chapter 11:
Sales Event Data - Comprised of invoice (sales) records. The Company accepts a customer's sales order, pick the goods, and ship the goods to the customer. The records are created as the process prepares and sends an invoice (generated after the goods are ordered, picked and shipped). The invoice number is used to apply collections against specific open invoices. Accounts receivable balances (and/or deferred revenue balances) at any point intime are computed as the difference between sales invoices and cash receipts.
Cash Receipts Event Data - Data is created when the customer payments are recorded and contains the details of each payment as reflected on the RA accompanying a payment. Each record in the data store normally shows the date the payment is recorded, customer identification, invoice number(s) and gross invoice amount(s), check amount, and check number.
Logical Data Descriptions for B/AR/CR process at a glance: Customer Master Data: contains a record of every customer that the entity is authorized to do business Accounts receivable master data: storage of all unpaid invoices that are awaiting final disposition (balance-forward system and the open-item system) Sales event data: comprised of invoice (sales) records created as the process prepares and sends an invoice (called a sales journal as a manual process) Accounts Receivable adjustments : created as sales returns, bad debt write-offs, or estimated doubtful accounts are processed Cash receipts event data: contains details of each payment; created when customer payments are recorded (called a cash receipts journal as a manual process) Remittance Advice file: stores copies of the RAs
Additional Control Plans for B/AR/CR Process
Shipped not billed (Tickler File) – To ensure timely billing of all shipped orders. If there is a shipping notice, with no corresponding customer or sales order, it should be investigated immediately to determine why.
Independent Billing Authorization – Shipment is supported by an actual sales order.
Authorized Process, Terms, Freight and Discounts – to ensure that invoices, accounts receivable and revenue reflect prices, terms, freight and discounts authorized by management. This is important to ensure compliance with the company's policies.
Independent Pricing Data – separation of duties between persons who approves unit prices and persons who make sales
Confirm Customer Accounts Regularly – Customers can review a listing of open invoices to confirm they are valid and accurate. An example of this is an account statement. This will help resolve any discrepencies or disagreements early and avoid any surprises later. The company should take this action to find out any disagreements early, before their external auditors discover them later and bring them to management's attention.
Immediately Endorsing Incoming Checks – Protects the checks from fraud, especially when the qualified endorsement "For Deposit Only" is used.
Immediately Separate Checks from RA – allows for acceleration of the process since the customer payment and deposit can be entered simultaneously. Also helps prevent lapping since the person posting the Remittance Advice does not have custody of the check.
Reconcile Bank Account Regularly – to confirm validity and accuracy of cash receipts
Monitor Open AR – To ensure cash is received in a timely manner. There should be existing policies in place to address past due ARs. Those ARs that are not collectible should be written off so that AR and income will not be overstated in the financial statements.
The Billing/Accounts Receivable/Cash Receipts Process:
This chapter explores in detail the B/AR/CR process. We will examine managerial decision making perspectives concerning this process; technologies available to support this process; and various models of this process (DFD's, ERD's, and system flowcharts). Finally the chapter will explore The Control Matrix for this process.Billing/Accounts Receivable/Cash Receipts Process Activities:
- Bill Customers
- Manage Customer Accounts
- Secure Payments from customers for goods or services
Definition: Process interacting the structure of people, equipment, methods and controls designed to create information flows and records that accomplish:a) Support Work routines of the credit department, cashier and A/R department - by capturing, recording, and communicating data resulting from the tasks of billing customer, managing customer accoungs, and collecting amounts due from customers
b) Support the problem solving process of financial managers - by managing the controller and treasury functions
c) Assist in preparation of internal and external reports including GAAP-based financial statements
Billing/Accounts Receivable/Cash Receipts Information Flows:
1. Facilitates repetitive work routines of the credit department, the cashier, and the accounts receivable department. These are the horizontal information flows.2 The vertical flows support the problem-solving of financial managers and also help in creating financial reports for internal and external use.
Horizontal Information Flows (10), please desccribe them:
1) The shipping department sends a shipping notice to the billing sector of the AR Dept.
2) The AR billing dept sends an invoice to the customer
3) The AR billing dept sends an invoice to the General Ledger
4) The AR billing dept sends an invoice to the cash receipts part of the AR dept.
5) Payment is received from the customer by the cashier
6) The cashier deposits the payment in the bank
7) The cashier sends a payment notice (RA) to the AR cash receipts dept.
8) The cashier sends a notice of the cash received to the General Ledger
9) The AR cash receipt dept compares (4) and (7) and posts to the customer account
10) The AR cash receipt dept sends notice of the cash applied to the General Ledger
Vertical Information Flows, explain:
Technologies Supporting OE/S Process:
Narratives of the OE/S Process:
B/AR/CR Process Context Diagram:
Once the shipping department ships the order, the B/AR/CR dept is notified. The B/AR/CR then sends the invoice to the customer and also notifies the General ledger process. Periodic customer statements are sent to the customer according to the payment agreements. Once the customer mails the payment along with the RA, the check is endorsed and deposited and again the GL process is notified of the payments so that the books can be updated. If there are any returns, receiving clerk notifies B/AR/CR of the returns.Then B/AR/CR sends a credit memo to the customer and also notifies the GL process so that the necessary adjustments can be made.
B/AR/CR Process Level-0 Diagram:
- The sales order notification and the shipping's billing notification must both exist before the billing process can begin.
- The perform billing process retrieves data from the customer master data and updates the sales event data.
- An invoice is sent to the customer and the accounts receivable master data is updated. In addition, the general ledger is updated to show a sale and accounts receivable balance.
- Accounts receivable data is sent to the manage customer accounts process.
- The manage customer accounts process sends out periodic statements based on the accounts receivable master data.
- If items are returned, the manage customer accounts process gives the customer a credit memo and updates the accounts receivable master data. Data is also needed from the accounts receivable master data to validate the return. The general ledger is also updated to reflect the returned merchandise.
- Long-standing accounts receivable items are retrieved from the A/R master data and the manage customer accounts process determines the estimated bad debts and write-off, which are sent to the G/L process. This data is also recorded in the AR adjustments event data and the A/R master data is updated to show a credit to accounts receivable.
- A/R master data is also sent to the receive payment process. When the customer sends in a payment, a deposit slip is generated, the cash
receipts event data is updated, the A/R master data is updated, the G/L process is updated, and a remittance advice is filed.B/AR/CR Process Level-1 (process 2) Diagram:
Types of Billing Systems:
In general, two kinds of billing systems exist:
B/AR/CR Process Level-1 (process 3) Diagram: Page 390
The customer's payment (check and remittance advice) are received. 3.1 -The check and remittance advice are compared. Checks and remittance advices that do not agree are rejected from being processed further until the discrepancies are resolved. The validated payments are processed further - 3.2 - checks are separated from the RAs, are endorsed, and are then prepared for deposit. 3.3 Deposit slips and the endorsed checks are sent to the depository bank. The cash receipts data is input and stored in the cash receipts event data store. The General Ledger Master is updated by the new cash receipts data that is posted. 3.4 The customer's payment details are recorded from the validated RAs. The customer payment data updates the correlating records in the Accounts receivable Master data file. Copies of the RAs are stored in the remittance advice file after all customer payments have been entered.
B/AR/CR System Flowchart (Billing Function): Page 395
The accounts receivable / billing ("AR/B") clerk keys in a request to the computer for the "Shipments not yet billed" report. The report is generated by the computer and displayed to the AR/B clerk who then reviews the report and selects the shipments to be billed. After the selection is made, the clerk keys in the selection of invoices on the computer and prepares a batch total of the invoices. The computer creates and prints the invoices and updates the accounts receivable, sales event, and general ledger data. The system then sends a "Billing completed" notice which is displayed on the screen for the AR/B clerk. The "Billing completed" report includes the amounts posted to the accounts receivable and related general ledger accounts. The computer generated invoices are also sent to the customer. The AR/B clerk reviews the "Billing Completed" report and compares the manual batch totals to the computer generated batch totals (run-to run total check). If any differences are noted in the two batch totals, an error reotine is initiated to resolve the differences (error routiine not shown).
Types of Billing Systems (pp. 394)
B/AR/CR System Flowchart (Cash Receipt Function): page 401
Mailroom clerk recieves checks and remittance advices from the customer. He/she endorses the checks. The remittance advices (RAs) are organized in such a way that the stubs can be used as turnaround documents. Batch totals are also prepared.The cash receipts data is scanned with OCR into the system. The RAs are sent to accounts receivable. The computer edits the data, compute batch totals, updates databases and prints 2 copies of deposit slips along with other various cash reports. Both copies of the deposit slips are sent to the cashier. The computer displays the batch totals. The mailroom clerk reconciles these to the batch totals previously prepared. If everything reconciles, the checks are sent to the cashier. The cashier compares the deposit slips with the checks. The checks along with one copy of the deposit slips are deposited at the bank and the second copy of the deposit slips are filed.
Sales Event Data - Comprised of invoice (sales) records. The Company accepts a customer's sales order, pick the goods, and ship the goods to the customer. The records are created as the process prepares and sends an invoice (generated after the goods are ordered, picked and shipped). The invoice number is used to apply collections against specific open invoices. Accounts receivable balances (and/or deferred revenue balances) at any point intime are computed as the difference between sales invoices and cash receipts.
Cash Receipts Event Data - Data is created when the customer payments are recorded and contains the details of each payment as reflected on the RA accompanying a payment. Each record in the data store normally shows the date the payment is recorded, customer identification, invoice number(s) and gross invoice amount(s), check amount, and check number.
Logical Data Descriptions for B/AR/CR process at a glance:
Customer Master Data: contains a record of every customer that the entity is authorized to do business
Accounts receivable master data: storage of all unpaid invoices that are awaiting final disposition (balance-forward system and the open-item system)
Sales event data: comprised of invoice (sales) records created as the process prepares and sends an invoice (called a sales journal as a manual process)
Accounts Receivable adjustments : created as sales returns, bad debt write-offs, or estimated doubtful accounts are processed
Cash receipts event data: contains details of each payment; created when customer payments are recorded (called a cash receipts journal as a manual process)
Remittance Advice file: stores copies of the RAs
Additional Control Plans for B/AR/CR Process